Portugal politicians try to save government

Portugal's Prime Minister Pedro Passos Coelho arrives for a weekly meeting with Portugal's President Anibal Cavaco Silva at the Belem presidential palace in Lisbon Thursday. Portugal's governing coalition parties have held urgent talks in a bid to resolve differences over crushing austerity policies that have pushed the government to the brink of collapse.ASSOCIATED PRESS

Associated Press

LISBON, Portugal -- The leaders of Portugal's governing coalition parties remained locked in negotiations Thursday as they attempted to repair differences that threatened to pitch the bailed-out country into turmoil and reignite concerns over Europe's debt crisis.

Prime Minister Pedro Passos Coelho, head of the senior coalition partner, and the leader of the junior partner, Popular Party chief Paulo Portas, met three times in 24 hours in an attempt to avoid the government's collapse in a dispute over austerity measures and other reported grievances concerning the relative standings of the two parties within the coalition. There was no immediate word on the progress of the talks.

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Portugal's political stability, certainly compared with turmoil in Greece, has helped ease investor concerns over the country's financial fate since a 78 billion euro ($101 billion) international rescue two years ago.

The relatively calm backdrop helped lower Portugal's borrowing costs and allowed it to enact a raft of economic reforms which European Central Bank president Mario Draghi on Thursday described as "remarkable."

German Finance Minister Wolfgang Schaeuble said he didn't expect any contagion from Portugal's difficulties to spread to the 16 other European countries which use the euro currency.

"I think the euro is now viewed on the world's financial markets as so stable that domestic political situations in individual countries ... don't mean a crisis for the stability of the euro as a whole," Schaeuble said in Berlin.

Investors had a different opinion, however, and Portugal's troubles helped send European and Asian stocks lower this week before recovering Thursday after the governing partners pledged to settle their differences.

Portas's resignation as Portuguese foreign minister earlier this week, after his demands for less austerity and more growth measures went unheeded, plunged the country into crisis mode.

The resignation of Finance Minister Vitor Gaspar, a technocrat with no party affiliations, on Monday fueled fears of a political meltdown. Gaspar complained he lacked political and public support for his austerity program.

Passos Coelho, the prime minister, refused to accept Portas's resignation and appealed for talks which began Wednesday night.

Passos Coelho met Thursday with President Anibal Cavaco Silva, who has to endorse any change in the Cabinet. Passos Coelho didn't reveal how the negotiations were going but said his coalition partner had given him assurances it didn't want to prolong the political instability.

Investors breathed a sigh of relief as the quarreling subsided. The interest yield on Portugal's benchmark 10-year bond slipped back to 7.21 percent after soaring above 8 percent the previous day. Though the rate is still far above the 5.23 percent it reached in May, it is way down on the 9.77 percent it was at the same time last year.

The Lisbon stock exchange also rallied, rising 3.73 percent to 5,431 at the close, after plunging 5.3 percent on Wednesday.

"Basically what the market is doing today is understanding that ... there is a big chance of an understanding between the partners in the coalition, and that situation is being reflected in stronger share prices," said Paulo Guerrero, a broker at Espirito Santo Investment Bank in Lisbon.

People in the streets, however, were less forgiving.

After enduring two years of austerity, that have included sharp hikes in income taxes and in sales taxes and cuts in public sector pay and pensions, the country has been mired in recession and seen its jobless rate ratchet up to 17.6 percent.

Among the Portuguese, exasperation with their political leaders was evident.

"It's a joke," said Filipa Pinto, a 51-year-old housewife sitting in the shade on a scorching hot day in Lisbon. "We're fighting to pay our bills at the end of the month and they're playing games."

Others thought that left-leaning parties, such as the Socialists who want more job-creation measures, ought to replace the current administration. The Socialists, though, were the party in government at the time of the bailout in 2011.

"We need to change the government. It's not working this way," said a 59-year-old unemployed woman called Deolinda, who declined to give her surname. "We need a party (in power) that can get the country moving again."

Making big changes in economic policy won't be easy, though. Despite the worst recession in almost 40 years, the bailout agreement signed by all three major parties demands further cuts in expenditure over the next year.

Portugal's creditors -- its partners in the eurozone and the International Monetary Fund -- won't hand over the bailout funds, which are delivered in stages, unless debt-heavy Portugal cuts even deeper.

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